As the ink dries on Nepal’s landmark new constitution, the nation still has a daunting reconstruction task ahead. Progress will require finding solutions other than well-intended efforts that could fuel aid dependency.

An estimated 350,000 houses and numerous school and public buildings were destroyed by earthquakes in April and May. The international community has pledged at least $4.4 billion towards reconstruction. From our perspective at the Dolma Impact Fund, the first international private equity and impact investment fund for Nepal, the nation is at an important crossroads.

(Photo Courtesy: Wikimedia Commons)

How reconstruction aid is managed and spent will help determine whether Nepal’s private sector can drive a sustainable employment and prosperity boom beyond reconstruction, or remain dependent on foreign aid. Prior to the earthquakes, 18% of the national budget was provided by foreign aid through grants and so-called “soft loans,” with low interest rates and long repayment periods.

Here are three ways to channel the influx of aid to Nepal: First, the government should manage a transparent tender process open to local firms. This would boost desperately needed employment and private-sector growth—critical to sustained economic development.

However, currently Nepal’s private sector would likely struggle to absorb the sudden inflow of aid, approximately equivalent to 25% of its gross domestic product. Local firms would also have limited capacity meeting compliance and quality standards demanded by international donors.

A second path is to hire foreign firms to lead rebuilding projects and import materials from trusted sources outside Nepal. India’s assistance encapsulates this approach. Part of that nation’s aid pledge includes loans tied to buying products and services from India.

A third approach is to outsource projects to international nongovernmental organizations. They typically have stronger compliance and monitoring than local firms.

The reconstruction effort will blend all three options. But prioritizing the first—strengthening local firms in both capacity and compliance—will enable Nepal, the poorest country in South Asia, to capture more of the economic benefits of reconstruction in the short and long-term.

Aside from directing aid, Nepal must ease the path for foreign companies to invest in local firms. This will help Nepali companies win and better fulfill rebuilding contracts and the domestic supply of materials. International investors, as minority shareholders, will be incentivized to implement a strategy that looks beyond near-term reconstruction revenues, leaving local firms in a position to use additional capacity to boost exports once reconstruction orders are satisfied.

International engineering, construction and supply-chain companies can bring technical skills, equipment and quality control to the Nepali firms they invest in. Such local-international partnerships combine the local knowledge necessary to fulfill contracts amid geopolitical challenges with the technical, financial and compliance capacity provided by international firms. Foreign investors would also introduce tighter corporate, environmental and social governance standards, which would mitigate Nepal’s persistent corruption.

Nepal’s key regulators and agencies are open to foreign direct investment. They engage with institutional investors and have taken steps to improve regulations. At the Dolma Impact Fund, we found Radhesh Pant, head of the Investment Board of Nepal, and Govind Pokhrel, head of the new National Reconstruction Authority, to have a deep understanding of the issues facing the private sector. Nepal also has no shortage of entrepreneurial talent.

So what’s stopping international investments and knowledge transfers? Not much. Unlike other frontier markets, Nepal has stable, decades-old institutions, such as a central bank, department of industry and a stock exchange. While much can still be improved, focusing on reducing barriers to entry and exit will have a disproportionately positive effect on attracting investors.

Nepal should follow India’s lead in limiting such barriers. Priority-sector FDI in India requires no prior approval, only ex post facto filing within 30 days of receipt of capital, whereas FDI in Nepal is subject to prior approval and timing uncertainty.

The Nepal Stock Exchange can also adopt good practices from India’s exchange. In Nepal, firms list at a fixed, arbitrary price, often at a significant discount to actual market value. Consequently, few firms go public unless mandated to do so. Once listed, all pre-IPO investors are locked in for three years. India has moved towards market pricing and reduced lock-in periods for many nonpromoter shareholders. These reforms have contributed to India’s rise to ninth among top global FDI recipients. In a high-risk market like Nepal’s, limit the freedom to exit and many investors simply won’t enter.

If aid is deployed as revenue to local firms and international partners are encouraged to invest, Nepal’s reconstruction can stimulate prosperity and employment in the private sector without leaving the country more dependent on charity. If Nepal can succeed, the nation will become a model for other developing nations on turning disaster into opportunity.

Mr. Gocher is CEO of Dolma Impact Fund and honorary professor of sustainable business at Nottingham University, Malaysia. Mr. Chin sits on Dolma’s advisory board and is a former U.S. ambassador to the Asian Development Bank.

This commentary first appeared in the Wall Street Journal on Sept. 21, 2015.